Money Market Funds (MMFs) have long been a cornerstone of Kenya’s investment landscape, offering individuals and institutions a low-risk avenue to grow savings while maintaining liquidity. However, since mid-2024, these funds have faced a persistent decline in yields, with average returns dropping from over 14% to approximately 13% by early 2025. This trend has raised concerns among investors reliant on MMFs for stable income. In this comprehensive analysis, we explore the drivers behind this decline, its implications for stakeholders, and strategies to navigate the evolving financial environment.
Key Takeaways
- MMF yields in Kenya have decreased from 14-16% to around 13% between mid-2024 and early 2025
- The Central Bank of Kenya’s rate cuts from 13% to 10.75% have significantly impacted returns
- Treasury Bill yields, which form 50-70% of MMF portfolios, have fallen considerably
- Investors should focus on net returns after fees rather than headline rates
- Diversification across different fund types and alternative investments is recommended
Table of Contents
Understanding Money Market Funds in Kenya
Money Market Funds are collective investment vehicles that pool capital from investors to purchase short-term, high-liquidity securities such as Treasury Bills (T-bills), commercial paper, and bank deposits. Managed by licensed fund managers under the oversight of Kenya’s Capital Markets Authority (CMA), MMFs prioritize capital preservation while offering returns marginally higher than traditional savings accounts.
A typical Kenyan MMF allocates 50–70% of its portfolio to government securities like T-bills, with the remainder split between corporate debt and cash deposits. For example, the Sanlam Money Market Fund held 59.2% in Treasury securities and 35.3% in corporate debt as of February 2025. This structure ensures stability but ties fund performance closely to interest rate fluctuations and government borrowing patterns.
| Portfolio Component | Typical Allocation | Example (Sanlam MMF) |
|---|---|---|
| Government Securities (T-bills) | 50-70% | 59.2% |
| Corporate Debt | 20-40% | 35.3% |
| Cash & Deposits | 5-15% | 5.5% |
Current Trends: The Downward Trajectory of MMF Yields
Declining Returns in 2024–2025
In June 2024, Kenya’s top-performing MMFs, such as Lofty Corban and Etica, offered net returns of 14.38% and 16.62%, respectively. By January 2025, however, the highest yield had fallen to 16.61% (Cytonn MMF), reflecting a 1.7% year-on-year drop. The Sanlam Money Market Fund reported a 12-month gross return of 16.7% in February 2025, down from 18–20% in previous years.
| Fund Name | June 2024 Return | January 2025 Return | Change |
|---|---|---|---|
| Lofty Corban MMF | 14.38% | 13.1% | -1.28% |
| Etica MMF | 16.62% | 15.3% | -1.32% |
| Cytonn MMF | 17.8% | 16.61% | -1.19% |
| Sanlam MMF | 15.6% | 13.9% | -1.7% |
Comparison with Alternative Investments
MMF returns now narrowly outpace T-bills, which yielded 13.9% for 91-day securities in early 2025. Savings accounts, meanwhile, offer 7–10%, making MMFs still attractive but less dominant for risk-averse investors.
| Investment Type | Average Yield (Jan 2025) | Liquidity | Risk Level |
|---|---|---|---|
| Money Market Funds | 13-16.7% | High (1-3 days) | Low |
| 91-day T-bills | 13.9% | Medium (3 months) | Very Low |
| Savings Accounts | 7-10% | Very High (Same day) | Very Low |
| Corporate Bonds | 15-18% | Low (Secondary market) | Medium |
Key Drivers of the Rate Decline
1. Central Bank of Kenya’s Monetary Policy Shifts
The Central Bank of Kenya (CBK) has aggressively cut its benchmark lending rate, from 13% in June 2024 to 10.75% by February 2025, to stimulate economic growth. Lower policy rates reduce borrowing costs for banks, which then decrease deposit and MMF rates to maintain margins. As Teddy Irungu of Genghis Capital notes, “Every 1% cut in the CBR translates to a 0.5–0.8% drop in MMF yields within three months”.
2. Falling Treasury Bill Yields
T-bills, the backbone of MMF portfolios, have seen yields plummet due to reduced government borrowing pressure. By February 2025, Kenya had already surpassed its domestic borrowing target by 102%, easing demand for high-yield securities. The 364-day T-bill rate fell from 16.2% in 2023 to 13.5% in early 2025, directly dragging MMF returns downward.
3. Inflation and Exchange Rate Stabilization
Inflation dropped to 2.99% by December 2024, allowing the CBK to prioritize growth over curbing price rises. Concurrently, the Kenyan shilling stabilized after years of volatility, reducing the risk premium embedded in interest rates.
4. Investor Behavior and Regulatory Changes
With yields softening, investors are shifting to longer-term bonds or equities, forcing MMF managers to accept lower returns to maintain liquidity. Additionally, new regulations, like the Risk-Based Credit Pricing Model (RBCPM), compel banks to lower lending rates, further squeezing deposit yields.
| Key Driver | 2023 Value | 2025 Value | Impact on MMFs |
|---|---|---|---|
| CBK Rate | 13% | 10.75% | Major Negative |
| 364-day T-bill Rate | 16.2% | 13.5% | Major Negative |
| Inflation Rate | 5.7% | 2.99% | Moderate Negative |
| KES/USD Exchange Rate | Volatile | Stable | Moderate Negative |
Implications for Investors
Reduced Income Streams
A retiree relying on a KSh 5 million MMF investment would earn approximately KSh 800,000 annually at a 16% yield but only KSh 665,000 at 13.3%—a 17% income drop.
Fee Sensitivity
With narrower margins, fees matter more. For instance, a fund charging 2% in annual fees reduces a 13% gross return to 11%, barely outpacing inflation.
Liquidity Trade-Offs
Some funds now impose longer withdrawal periods or higher minimum balances to manage outflows, countering MMFs’ traditional liquidity advantage.
Case Study: Impact on Fixed Income Retiree
A retiree with KSh 10 million in MMF investments would experience the following impact:
- 2023 Income (at 16%): KSh 1,600,000 per year
- 2025 Income (at 13.3%): KSh 1,330,000 per year
- Annual Income Reduction: KSh 270,000
- Monthly Income Reduction: KSh 22,500
This significant reduction in passive income highlights why investors need to reconsider their fixed-income strategy in the current environment.
How Fund Managers Are Adapting
Portfolio Rebalancing
Managers like Sanlam have increased allocations to longer-term Treasuries (182-day and 364-day T-bills) to lock in higher yields before further rate cuts.
Cost Optimization
Funds are renegotiating custodian fees and automating processes to lower operational costs, preserving investor returns despite declining revenues.
Product Diversification
Some asset managers now offer hybrid funds blending MMFs with corporate bonds or real estate to enhance yields. For example, Cytonn’s High-Yield Fund combines MMFs with private equity.
Strategies for Investors in a Low-Yield Environment
1. Compare Net Returns, Not Headline Rates
Always deduct management fees (typically 1.5–2.5%) and withholding tax (15%) when evaluating funds. A 14% gross return becomes 11.9% net, which may still outperform T-bills.
| Fund | Gross Return | Management Fee | Withholding Tax | Net Return |
|---|---|---|---|---|
| Fund A | 14.0% | 1.5% | 15% of interest | 11.9% |
| Fund B | 13.5% | 1.0% | 15% of interest | 11.6% |
| Fund C | 16.0% | 2.5% | 15% of interest | 12.8% |
2. Diversify Across Fund Types
- Treasury-Only MMFs: Lower risk, e.g., Sanlam (13.9% return)
- Corporate-Bond MMFs: Higher risk-reward, e.g., Apollo (15.65%)
- Hybrid Funds: Mix of assets for balanced exposure
3. Monitor Macroeconomic Indicators
Track CBK rate announcements, inflation reports, and T-bill auction results to anticipate yield trends. The CBK’s next MPC meeting in June 2025 could signal further cuts.
4. Consider Alternative Short-Term Instruments
- Government Bonds: 2–5 year tenors offer 12–14% yields
- Corporate Commercial Paper: Yields up to 18% for 6-month terms
- Digital Loans Platforms: Peer-to-peer lending offers 15–25% returns but with higher risk
The Road Ahead: Will MMF Rates Rebound?
While the CBK projects sustained rate cuts to 9.5% by late 2025, MMF yields are unlikely to recover soon. However, factors like renewed inflationary pressures or a shilling depreciation could reverse the trend. For now, investors must recalibrate expectations, prioritizing capital preservation and diversification over high returns.
As the Kenyan market matures, MMFs will remain vital for financial stability, albeit in a more subdued role. By staying informed and agile, investors can continue leveraging these instruments to safeguard and grow their wealth.
